Britain facing biggest cuts for decades in austerity budget

20th June 2010, Comments 0 comments

Britain is preparing for big spending cuts and tax hikes in the new government's emergency budget on Tuesday as Prime Minister David Cameron's coalition attacks a record deficit.

Chancellor of the Exchequer George Osborne will deliver the Conservative-Liberal Democrat coalition's first budget to parliament since taking power after last month's general election.

Preparing millions of public sector workers for savage cuts, Cameron said it was "fair" that they should face a squeeze on pay and pensions.

"There is no way of dealing with an 11 percent budget deficit just by hitting either the rich or the welfare scrounger," he said in an interview with The Times newspaper on Saturday.

Finance minister Osborne was meanwhile reportedly ready to announce a freeze in welfare benefit payments.

He is thought to be targeting overall savings of up to 40 billion pounds (48 billion euros, 60 billion dollars), with state borrowing forecast to reach 155 billion pounds, or 10.5 percent of gross domestic product (GDP), in the year to March 2011.

"We expect the chancellor to set out the sharpest fiscal tightening in the UK's postwar history," Barclays Capital analyst Simon Hayes said ahead of the government's tax and save plans.

"The new government has staked its reputation on bringing the public finances under control, and an aggressive package of spending cuts and tax increases is to be expected," he added.

Britain's public deficit had rocketed to a record-high of 156 billion pounds in the 2009/10 fiscal year which ended in March, as severe recession hit tax revenues and as the government spent billions of pounds on bailing out banks.

"This coalition government has inherited from its predecessor one of the largest deficits in the world," Osborne said last week.

The government meanwhile announced last Thursday that it had decided to axe or suspend projects planned by the former Labour government that were set to have cost about 11.0 billion pounds.

The coalition had already announced plans in May to cut spending by about 6.2 billion pounds in 2010/11.

"The coalition government's first budget announcement... looks set to result in the most aggressive spending cuts seen in at least a generation," said James Knightley, senior economist at ING bank.

Osborne is also expected to unveil tax increases in Tuesday's budget. Media reports suggest that he will raise VAT -- a tax on goods and services -- to 20 percent from 17.5.

"Higher VAT is the most likely tax hike," said Knightley, while analysts add that an increase to 20 percent should raise about 12 billion pounds a year.

The chancellor may also raise capital gains tax -- or profits from the sale of assets such as second homes -- and introduce a levy on banks.

On an upbeat note, Osborne has pledged to cut business tax and to reform rules on foreign companies operating here in a bid to woo multinational corporations.

While welcoming the tax-cut pledge and also plans to slash public spending, Britain's biggest employers' organisation has urged the government to avoid "damaging" tax hikes.

The Confederation of British Industry said tax increases would make it harder for companies to win business but noted that cuts to public spending would protect future growth.

Britain's economy is predicted to grow by only 2.6 percent in 2011 as it recovers from a record recession that ended late last year, according to the Office for Budgetary Responsibility (OBR), an independent fiscal watchdog set up by the new government.

That compared with a 3.25-percent expansion forecast by the previous Labour government. The economy was expected to expand by 1.3 percent in 2010, which marked a slight upward revision, the OBR added.

© 2010 AFP

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